Submitted by Nick Cunningham via OilPrice.com,
OPEC warned in newly released report that oil prices might not rise above $60 per barrel until the end of the decade, in an acknowledgement that an array of bearish forces will conspire to keep a lid on any price rally.
OPEC’s new World Oil Outlook (WOO) offers medium and long-term predictions for the oil market. OPEC’s Reference Basket (ORB) price will average $40 per barrel this year, and the group projects that the price will rise by $5 per barrel each year through the rest of the decade. That only takes ORB prices up to $60 per barrel in 2020.
That is a remarkable prediction from a group of oil-exporting countries, often known for a much more bullish outlook for oil. There are a few reasons that OPEC is more resigned to a “lower for longer” mantra.
OPEC admitted that things have not gone according to plan since it decided to abandon market intervention in November 2014. The group, led by Saudi Arabia, thought that low oil prices would stoke demand and also push out high-cost producers, two predictions that did not play out, at least to the degree that top OPEC officials predicted. “While analysts initially anticipated that lower oil prices would have a positive impact on global economic growth, the reality is that the overall impact has been neutral. Scars from the economic crisis such as high household debt levels, fiscal imbalances and high unemployment, combined with industry investment cuts, have limited the propensity to consume,” OPEC wrote in its WOO report.
U.S. gasoline demand did hit a record high this year, but it took two years of low prices to reach that level and oil consumption lagged behind the huge spike in miles traveled, an indication that fuel efficiency blunted the impact of more driving. Meanwhile, China’s demand has continued to soften even as oil prices languished at record lows.
OPEC also conceded that “the resilience of supply in the lower oil price environment caught the industry by surprise, particularly tight oil in North America. Productivity gains and cost reductions have helped producers maintain output at higher levels than expected and thus delay the slowdown. In addition, the role of financial markets, in particular that of hedging has proven to be an efficient cushioning mechanism.”
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